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Superfunds March 2016
However, perhaps the bad news for investors
is that strategists’ most-likely scenario is close
to their best-case scenario. In this late stage
of the economic cycle, it is easier to see more
downside from this central scenario than upside.
Markets could be spooked in their view if inflation
pressures emerge and force more aggressive
Federal Reserve action, or if economic growth
turns out weaker than expected and profits
growth disappoints.
KEY INDICATORS
The outlook also suggests that strategists are
on the lookout for three bearish scenarios,
which would result in a more negative outlook,
including:
• weak profit growth: this could be caused
by slower-than-expected economic growth
in the developed economies. It could be
accompanied by declining profit margins
from rising wages, a stronger US dollar
(USD) for US companies, and rising US
interest costs
• rising US wages: the US market could
experience higher-than-expected inflation as
strong jobs growth pushes up wages, pulls
down profit margins and triggers
more Federal Reserve rate increases than
currently expected
• feeble emerging markets trade: exports
from emerging markets are contracting.
These need to recover for the most-likely
scenario to play out. Strategists also believe
a continued trade downturn in emerging
markets could flow through to developed
economies.
THE SIGNIFICANCE OF HEADLINE NEWS ON
INVESTMENT MARKETS
While there are valid reasons to worry about the
impact of a wide range of political and social
crises in the world on markets, strategists believe
currently known concerns such as Islamic State
activity will not be ‘game changers’ in 2016. Most
such events or ‘noise’ may cause very short-term
volatility and present potential buying opportunities
for very nimble investors.
However, there are two potential events that
could pose material risk to financial markets:
• tensions in the South China Sea: the US
and China disagreement over the ‘Freedom
to Navigate’ in the South China Sea and East
China Sea could spill into financial markets
• an emerging market ‘temper tantrum’:
this could be sparked by an economic crisis in
a sizable emerging market country—such as
Brazil, Turkey or South Africa.
The global outlook states that the chance of
the first event is very small, but the impact will
be large. The chance of the second event is
considered to be slightly higher, but the impact
much smaller.
ASSET-CLASS VIEWS
Russell Investments’ strategists expect moderate
equity returns, led by Europe and Japan, and a
gradual rise in long-term interest rates as bond
markets respond to Federal Reserve action.
Equities
Equities globally are expected to produce low
single-digit returns over 2016. This includes:
• a favouring of Europe and Japan due to their
better valuations and higher expected profit
growth than other markets
• an expectation that the US will trail global
markets due to high valuations and
profitability coming under pressure, despite a
positive business cycle score
• despite attractive valuation levels, emerging
markets are expected to be the laggard over
the short term, based on concerns that the
business cycle has not found the bottom yet.
Falling commodity prices, a rising USD and
the impact of Federal Reserve tightening on
emerging market economies mean that the
cycle is still a significant headwind. There
may be an opportunity to take advantage of
the value in emerging market assets during
the year, and strategists will be watching out
closely for this
• following global market volatility and the
large sell-off in the Chinese market at the
start of 2016, there is a neutral view on